National income & related concepts


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National income & related concepts

  1. 1. National Income & Related Concepts
  2. 2. Rationale & Inception <ul><li>The official estimates of national income and related aggregates were developed to meet the requirements for planning and policy purposes. </li></ul><ul><li>Soon after Independence, the Government of India set up a High Powered Expert Committee in 1949 known as 'National Income Committee' under the Chairmanship of Prof. P.C. Mahalanobis . </li></ul><ul><li>In accordance with the methodology and the pattern of presentation recommended by the National Income Committee, the first official estimates of national income were prepared by the Central Statistical Organisation (CSO) with base year 1948-49. </li></ul><ul><li>These estimates at constant (1948-49) prices along with the corresponding estimates at current prices and the accounts of the Public Authorities were published in the publication, 'Estimates of National Income' in 1956. </li></ul>
  3. 3. National Income <ul><li>National income is the money value of all the final goods and services produced by a country during one year. </li></ul>
  4. 4. National Income at current prices <ul><li>Goods and services are valued at the prices prevailing in the markets in that particular year. </li></ul><ul><li>E.g. National Income of 2004-05: goods and services are valued at prices prevailing in the year 2004-05. </li></ul>
  5. 5. National Income at constant prices <ul><li>Goods and services are valued at the price prevailing in the base year . </li></ul><ul><li>E.g. National Income of year 2004-05 at 1993-94 prices (prices of goods and services prevailing in year 1993-94). </li></ul>
  6. 6. Base Years <ul><li>Base years of the National Accounts Statistics series have been shifted from 1948-49 to 1960-61 in August 1967, </li></ul><ul><li>from 1960-61 to 1970-71 in January 1978, </li></ul><ul><li>from 1970-71 to 1980-81 in February 1988 and </li></ul><ul><li>from 1980-81 to 1993-94 in February 1999. </li></ul><ul><li>In line with this practice, the CSO introduced the New Series of National Accounts Statistics with 1999-2000 as the base year, on 31st January, 2006 (hereinafter will be referred as New Series). </li></ul>
  7. 7. Choice of Base year <ul><li>National Accounts Statistics have mostly been revised decennially changing the base to a year synchronizing with the year of decennial Population Census => primarily because in the base year estimates, the information on work force has played an important role and workforce estimates were obtained from the Population Census. </li></ul><ul><li>1993-94 instead of 1990-91 => it was observed that the data on worker participation rate (WPR), captured by the National Sample Survey Organisation (NSSO) was better than the one estimated through the Population Census. Accordingly, the CSO used the workforce estimates based on National Sample Survey (NSS) workforce participation rates from the NSS 1993-94 (50th Round) survey results, and revised the base year of national accounts to 1993-94. </li></ul><ul><li>In continuation with this practice, the new series of national accounts released on 31st January, 2006 adopted 1999-2000 as the base year, as it has used the data on WPR from the NSS 55th round Quinquennial survey on Employment and Unemployment, conducted in 1999-2000. In the new series, the WPR data has been used in conjunction with population data of the Population Census, 2001. </li></ul>
  8. 8. Guiding Principles for New Series <ul><li>The three major components influencing the present revision exercise include </li></ul><ul><li>revision of base year to a more recent year (for meaningful analysis of the structural changes in the economy), </li></ul><ul><li>complete review of the existing data base and methodology employed in the estimation of various macro-economic aggregates including choice of the alternative databases on individual subjects and </li></ul><ul><li>to the extent feasible, implementing the recommendations of the System of National Accounts (1993 SNA) prepared under the auspices of the Inter Secretariat Working Group on National Accounts comprising of the European Communities (EUROSTAT), International Monetary Fund (IMF), Organisation for Economic Cooperation and Development (OECD), United Nations and World Bank. </li></ul><ul><li>Thus, the new series has been introduced by the CSO after a comprehensive review of both the databases and the methodology employed in the estimation of various macro-economic aggregates </li></ul>
  9. 9. Per Capita Income <ul><li>National Income per head of population. </li></ul><ul><li> NY </li></ul><ul><li> PCY = ----------------- </li></ul><ul><li> Population </li></ul>
  10. 10. Some Basic Concepts
  11. 11. Domestic Territory of a Country <ul><li>Includes: </li></ul><ul><li>Territory lying within the political frontiers, including territorial waters of the country </li></ul><ul><li>Ships & aircrafts operated by residents of te country between 2 countries </li></ul><ul><li>Fishing vessels, oils & natural gas rig, floating platforms operated by residents of the country in international waters or engaged in extraction in area in which the country has exclusive rights of exploitation. </li></ul><ul><li>Embassies, consulates & military establishments of the country located abroad. </li></ul>
  12. 12. Normal Residents of a Country <ul><li>Resident => a person who “ordinarily” resides in a country and whose centre of interest lies in that country. </li></ul><ul><li>Normal residents => covers both individuals and institutions. It includes nationals and non-nationals residing in a country. </li></ul>
  13. 13. Exceptions <ul><li>International organisations like World Health Organisation, World Bank, IMF, ILO </li></ul><ul><li>Resident HHs & individuals cover all individuals living within the domestic territory except the following: </li></ul><ul><ul><ul><li>Foreign visitors for recreation, holidays, medical treatment, study tours, conferences, etc. </li></ul></ul></ul><ul><ul><ul><li>Crew member of foreign vessels, commercial travelers & seasonal workers. </li></ul></ul></ul><ul><ul><ul><li>Officials, diplomats & members of armed forces of a foreign country </li></ul></ul></ul><ul><ul><ul><li>Employees of international organisations who are not citizen of the country in which the office is located </li></ul></ul></ul><ul><ul><ul><li>Foreigners who are the employees of non-resident enterprises and who have come to the country for installing machines or equipment purchased from their employers. </li></ul></ul></ul>
  14. 14. Stock variables <ul><li>Measures of economic activity at a point in time . </li></ul>
  15. 15. Examples of Stock Var. <ul><li>Wealth (an accumulation of savings over time)   </li></ul><ul><li>Debt (an accumulation of borrowing over time) </li></ul><ul><li>Capital Stock (Factories, Machinery, Inventory, Infrastructure) </li></ul><ul><li>The Money Supply </li></ul><ul><li>Any Balance Sheet measures (Assets, Liabilities, Owner's Equity) </li></ul>
  16. 16. Flow Variables <ul><li>Economic activity measured per unit of time . </li></ul>
  17. 17. Examples of Flow Var. <ul><li>Income (Household, Per-Capita, National) </li></ul><ul><li>Budget Deficits </li></ul><ul><li>Investment Expenditure </li></ul><ul><li>Consumption Expenditure </li></ul><ul><li>Any Income Statement measures (Sales Revenue, Gross Profit, Expenses) </li></ul>
  18. 18. Closed Economy <ul><li>A country which has no economic relations with other countries. </li></ul><ul><li>All other countries (except the one under consideration) are grouped into one category “rest of the world”. </li></ul>
  19. 19. Open Economy <ul><li>A country having economic relations with the rest of the world. </li></ul><ul><ul><ul><li>Selling goods and services to foreigners (exports) </li></ul></ul></ul><ul><ul><ul><li>Purchasing goods and services from the rest of the world (imports) </li></ul></ul></ul><ul><ul><ul><li>Selling shares, bonds, debentures to foreigners </li></ul></ul></ul><ul><ul><ul><li>Lending and borrowing </li></ul></ul></ul><ul><ul><ul><li>Sending gifts to foreigners and receiving gifts from them </li></ul></ul></ul><ul><ul><ul><li>Normal resident going to foreign countries to work there, and foreign residents coming and working in the domestic territory of the country. </li></ul></ul></ul>
  20. 20. Net Factor Income from Abroad <ul><li>Income attributable to factor services rendered by the normal residents of a country to the rest of the world less factor services rendered to them by the rest of the world. </li></ul><ul><li>Includes: </li></ul><ul><li>Net compensation of employees </li></ul><ul><li>Net income from property and entrepreneurship (interest, rent, profits and dividends); and </li></ul><ul><li>Net retained earnings of resident companies abroad. </li></ul>
  21. 21. Basic Economic Activities
  22. 22. <ul><li>Production </li></ul><ul><li>Consumption </li></ul><ul><li>Capital Accumulation </li></ul>
  23. 23. Production <ul><li>Any activity which produces a commodity or increases the value of a commodity already produced. </li></ul>
  24. 24. <ul><li>All goods and services sold in the market </li></ul><ul><li>Goods & services not sold in the market but provided free of cost or at nominal price </li></ul><ul><li>Produced Goods which do not reach the market (self-consumption) </li></ul><ul><li>Own account production of fixed assets by government, business enterprises, etc. </li></ul><ul><li>Imputed rent of owner occupied houses. </li></ul>
  25. 25. Exclusions <ul><li>Domestic services rendered within the household by housewives and other family members </li></ul><ul><li>‘leisure time’ activities like growing fruits, flowers and vegetables in the kitchen garden, painting the house, repairing electrical appliances and household furniture . </li></ul>
  26. 26. Consumption <ul><li>Using up of goods and services to satisfy human wants. </li></ul><ul><li>Destruction of utility. </li></ul>
  27. 27. Points to note……. <ul><li>No time gap between the production and consumption of services . </li></ul><ul><li>Durable goods continue to provide service for some time…. But they are treated as consumed the moment they are purchased. </li></ul><ul><li>Goods destroyed in accidents, natural disasters, etc. are excluded. </li></ul>
  28. 28. When do we take account? <ul><li>Production of goods : at the point of production. </li></ul><ul><li>Production of services : at the moment they are rendered. </li></ul><ul><li>Trading services : at the point of sale. </li></ul><ul><li>Government service : counted when cost is incurred to produce these services. </li></ul><ul><li>Consumption : at the point when commodities are purchased. </li></ul>
  29. 29. Capital Formation <ul><li>Surplus of production over consumption in an accounting year. </li></ul><ul><li>That which adds to further production. </li></ul>
  30. 30. <ul><li>Construction of New Assets (buildings, roads, bridges, transport equipment). </li></ul><ul><li>Production of machine and equipment </li></ul><ul><li>Increase in the stock of raw materials, semi-finished goods and finished goods during an accounting year. </li></ul>
  31. 31. Income Concepts
  32. 32. Net Domestic Product at Factor Cost <ul><li>Also called Domestic Factor Income (DFY) </li></ul><ul><li>NDP (FC) is defined as the net value added by all the producers within the domestic territory of the country. </li></ul>
  33. 33. NDP (FC) = Wages + Rent + Interest + Profit + Mixed Income of the self-employed NDP (FC) = compensation of employees + operating surplus + mixed income of self-employed
  34. 34. Gross Domestic Product <ul><li>GDP (FC) = NDP (FC) + D </li></ul><ul><li>Where D = depreciation </li></ul>
  35. 35. <ul><li>GDP (MP) = GDP (FC) + N.I.T </li></ul><ul><li>Where N.I.T = net indirect taxes </li></ul><ul><ul><ul><ul><ul><li>= I.T. – S </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>I.T = Indirect Taxes </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li> S = Subsidies </li></ul></ul></ul></ul></ul>
  36. 36. Gross National Product <ul><li>GNP (MP) = GDP (MP) + NFA </li></ul><ul><li>Where NFA = Net Factor Income from abroad </li></ul>
  37. 37. Important features of GNP <ul><li>Expressed in terms of money. </li></ul><ul><li>Includes only those items which are produced during the time for which GNP stands (flow concept). </li></ul><ul><li>Accounts for only those goods traded through the official market. </li></ul><ul><li>Intermediate goods not included. </li></ul><ul><li>Excludes non-productive transactions and second-hand sales. </li></ul>
  38. 38. National Income <ul><li>Factor income accruing to the normal resident of the country. </li></ul><ul><li>NNP (MP) = GNP (MP) – D </li></ul><ul><li>NNP (FC) = NNP (MP) – NIT </li></ul><ul><li> = W + R + I + P + Mix Y + NFA </li></ul><ul><li> = National Income (NY) </li></ul>
  39. 39.   NFA (6)     NIT (5) 5 6     D (4) 4 4 5 6 Wages (1) 1 1 1 1 1 R+I+P (2) 2 2 2 2 2 Mixed Income (3) 3 3 3 3 3 NDP (FC) GDP (FC) GDP (MP) GNP (MP) NNP (MP) NNP (FC)   NY
  40. 40. Important relations <ul><li>Gross – Net = Depreciation </li></ul><ul><li>M.P. – FC = N.I.T </li></ul><ul><li>National – Domestic = NFA </li></ul>
  41. 41. Quick Review <ul><li>NDP (FC) </li></ul><ul><li>W + I + R + P + Mix Y </li></ul><ul><li>GDP (MP) </li></ul><ul><li>NDP(FC) + D + NIT (=IT - S) </li></ul><ul><li>Widest concept of NY? </li></ul><ul><li>GNP (MP) </li></ul><ul><li>= NDP(FC) + D + NIT (=IT - S) + NFA </li></ul><ul><li>= GDP (MP) + NFA </li></ul><ul><li>National Income (NY) </li></ul><ul><li>NNP (FC) = NDP (FC) + NFA </li></ul><ul><li> = GNP (MP) – D – NIT </li></ul>
  42. 42. 6.9 7.7 8.9 9.6 8.6 9.3 8.7 9.4 2001-02 5.3 6 7.2 7.9 7.6 8 7.7 8 2000-01                       Growth rates (%) 23222 23241 2531223 2535627 2549139 2553334 2843897 2830465 2004-05 21142 20989 2268576 2252070 2286826 2266148 2543396 2519785 2003-04 18988 19040 2003282 2008770 2019972 2021936 2255574 2254888 2002-03 17883 17823 1856217 1848229 1876285 1863795 2097446 2081474 2001-02 16729 16555 1704719 1686995 1727452 1705104 1930184 1902999 2000-01 15886 15625 1590212 1564048 1605643 1579479 1792292 1761838 1999-00 New Series 1993-94 Series New Series 1993-94 Series New Series 1993-94 Series New Series 1993-94 Series Per capita income (Rs.) NNP at factor cost (Rs. Crore) NDP at factor cost (Rs. Crore) GDP at factor cost (Rs. Crore) Year (Rs. crore) (at current prices) 1999-2000 to 2004-2005 Estimates of GDP, NDP, NNP and Per Capita Income
  43. 43. 18517 11799 1986858 1266005 2004703 1274074 2226041 1430548 2003-04 16910 10754 1755281 1115171 1775952 1125480 1978056 1267945 2001-02 16223 10308 1653088 1050338 1675633 1062492 1870388 1198592 2000-01 15886 10071 1590212 1008114 1605643 1019296 1792292 1148367 1999-00 New Series 1993-94 Series New Series 1993-94 Series New Series 1993-94 Series New Series 1993-94 Series Per Capita Income (Rs.) NNP at factor cost (Rs. Crore) NDP at factor cost (Rs. Crore) GDP at factor cost (Rs. Crore) Year (Rs. crore) (old series at 1993-94 prices and new series at 1999-2000 prices) (at constant prices) 1999-2000 to 2004-2005 Estimates of GDP, NDP, NNP and Per Capita Income
  44. 44. Other Income Concepts
  45. 45. Sectors of the Economy <ul><li>Economy = Government + Private </li></ul><ul><li>Government = central, state & local </li></ul><ul><li>Private = households (HH). </li></ul><ul><li>Firms = government + HH </li></ul>
  46. 46. Private Income <ul><li>Private Income = NDP (FC) </li></ul><ul><li>– Income from property & entrepreneurship accruing to government </li></ul><ul><li>– savings of non-departmental enterprises </li></ul><ul><li>+ National Debt Interest </li></ul><ul><li>+ NFA </li></ul><ul><li>+ current transfers from government </li></ul><ul><li>+ other transactions from rest of the world. </li></ul>
  47. 47. Personal Income <ul><li>Current Income of persons or HHs from all sources. </li></ul><ul><li>Personal Income = Private Income </li></ul><ul><li>– savings of private corporate sector net of retained earnings of foreign sector </li></ul><ul><li>– Corporation Tax </li></ul>
  48. 48. Personal Disposable Income <ul><li>Income at the disposal of the HHs from all sources. </li></ul><ul><li>PDY = Personal Income </li></ul><ul><li>– Direct Taxes paid by HHs </li></ul><ul><li>– miscellaneous receipts of government. </li></ul>
  49. 49. Methods to Measure National Income
  50. 50. Circular Flow of National Income <ul><li> Production </li></ul>Income Expenditure
  51. 51. Three phases of the circular flow <ul><li>Production : </li></ul><ul><li>sum of net value added by all the producing enterprises (including the government) </li></ul><ul><li>Distribution : </li></ul><ul><li>total income generated in the production of goods and services </li></ul><ul><li>Disposition : </li></ul><ul><li>sum of expenditures of the three spending units (general government, consumer households and producing enterprises). </li></ul>
  52. 52. Product (Value Added) Method <ul><li>Measures the contribution of each producing enterprise in the domestic territory of the country. </li></ul>
  53. 53. Steps to measure VA <ul><li>Identify the producing enterprises </li></ul><ul><li>Classify them into industrial sectors according to their activities </li></ul><ul><li>Estimate the net value added by each enterprise as well as of each industrial sector </li></ul><ul><li>Adding up the values added by all the sectors. </li></ul>
  54. 54. An Example
  55. 55. <ul><li>Estimate the following: </li></ul><ul><li>Value of output </li></ul><ul><li>Value of intermediate consumption </li></ul><ul><li>Value of depreciation </li></ul>
  56. 56. <ul><li>Value of Output = Volume of physical output x Market Price </li></ul><ul><li>Value of intermediate consumption = price paid by the enterprise. </li></ul>
  57. 57. Include: <ul><li>Own account production of fixed assets by government, enterprises & households </li></ul><ul><li>Production for self consumption </li></ul><ul><li>Imputed rent of owner-occupied houses </li></ul><ul><li>Not included : </li></ul><ul><li>Sale of second-hand goods </li></ul><ul><li>Brokerage and commission earned by dealers of second hand goods are a part of current production. </li></ul>
  58. 58. <ul><li>GDP (MP) = </li></ul><ul><li> NVA by Primary sector </li></ul><ul><li>+ NVA by Secondary sector </li></ul><ul><li>+ NVA by Tertiary sector </li></ul><ul><li>NDP (FC) = Value of Output </li></ul><ul><li>– Value of intermediate consumption </li></ul><ul><li>– D - NIT </li></ul>
  59. 59. Income Method <ul><li>For every rupee’s worth of goods & services produced, a rupee’s worth of income is generated. </li></ul><ul><li>Income Method should give the same value of National Income as Value Added Method. </li></ul>
  60. 60. Steps involved: <ul><li>Identifying the producing enterprises which employ factor inputs </li></ul><ul><li>Classifying factor payments </li></ul><ul><li>Estimating factor payments </li></ul>
  61. 61. <ul><li>NDP (FC) = Wages + Rent + Interest + Profits + Mixed Income of self-employed </li></ul><ul><li>National Income = NDP (FC) + NFA </li></ul>
  62. 62. Include: <ul><li>Value of production for self consumption. </li></ul><ul><li>Imputed rent of owner occupied houses. </li></ul>
  63. 63. Exclude: <ul><li>All transfer payments </li></ul><ul><li>Illegal incomes </li></ul><ul><li>Windfall gains (lotteries) </li></ul><ul><li>Death duties, gift tax, wealth tax </li></ul><ul><li>Corporation tax </li></ul><ul><li>Income tax </li></ul>
  64. 64. Expenditure Method <ul><li>National Income is the sum of all final expenditures, including : </li></ul><ul><ul><ul><li>Expenditure on private consumption (C) </li></ul></ul></ul><ul><ul><ul><li>Gross investment (both private & public) (I) </li></ul></ul></ul><ul><ul><ul><li>Expenditure on government (federal, state & local) (G) </li></ul></ul></ul><ul><ul><ul><li>Foreigner’s expenditure on our exports (X) net of our expenditure on imports from abroad (M). </li></ul></ul></ul>
  65. 65. <ul><li>GDP (MP) = C + G + I + X – M </li></ul><ul><li>GDP (MP) = PFCE + GFCE + Gross Fixed Capital Formation + Change in stocks + Net Exports of goods & services. </li></ul>
  66. 66. <ul><li>PFCE = volume of sales in market x retail price (in domestic market) </li></ul><ul><li>Includes direct purchase in domestic market by non-resident HHs ( deduct this) </li></ul><ul><li>Add direct purchase by resident HHs abroad </li></ul><ul><li>Production for self consumption is also a part of final consumption </li></ul><ul><li>= volume of production x prices prevailing in neighbourhood market. </li></ul><ul><li>Include imputed rent of owner occupied houses. </li></ul>Private Final consumption expenditure
  67. 67. Government Final Consumption Expenditure <ul><li>Includes: </li></ul><ul><li>Compensation of employees </li></ul><ul><li>Net purchase of goods and services by the government </li></ul><ul><li>= total volume of sales to the government x retail prices in the domestic market </li></ul><ul><li>Purchases from abroad </li></ul>
  68. 68. Gross Capital Formation <ul><li>Investment = Gross Fixed Capital Formation + Changes in stocks </li></ul><ul><li>GFCF </li></ul><ul><ul><ul><li>Construction </li></ul></ul></ul><ul><ul><ul><li>Machine and Equipment </li></ul></ul></ul>
  69. 69. Expenditure on construction <ul><li>Found out by either: </li></ul><ul><li>Total money spent on construction, or </li></ul><ul><li>Value of inputs used </li></ul><ul><li>Commodity-flow approach = </li></ul><ul><li>Volume of material inputs used in construction x price paid by builders at site </li></ul>
  70. 70. Includes: <ul><li>Own account production of fixed assets by producing sectors </li></ul><ul><li>Purchase of new houses by consumer households </li></ul><ul><li>Work in progress at site of construction </li></ul><ul><li>Capital repairs like major alterations of old buildings, or adding a new room to an existing building. </li></ul>
  71. 71. Machine & Equipment <ul><li>Final Expenditure method = </li></ul><ul><li>Volume of final sales x retail price prevailing in the market </li></ul><ul><li>Commodity-flow approach = </li></ul><ul><li>Volume of machine produced in the current year x prices paid by the purchasers </li></ul>
  72. 72. Change in stocks <ul><li>Physical change in stocks with producers x market price </li></ul><ul><li>Physical change in stocks = </li></ul><ul><li>Stocks at the end of the previous accounting year (opening stock) – stocks at the end of the current accounting year (closing stock) </li></ul>
  73. 73. Includes: <ul><li>Stocks of raw materials, work-in-progress and finished products (inventories) held by enterprises and households </li></ul><ul><li>Stocks of strategic materials, food grains and other commodities of special importance to the nation, in the possession of the government. </li></ul><ul><li>Livestock raised for slaughter by enterprises. </li></ul>
  74. 74. Find out the Gross Value Added at Market Price: <ul><li>A sells intermediate goods worth Rs.400 to B. B sells the manufactured goods worth Rs.400 to C and worth Rs.200 to D. C sells his goods to D for Rs.500. D sells the final goods to the consumer household for Rs.850. </li></ul>
  75. 75. <ul><li>Happy Counting!!! </li></ul>
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